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The Caribbean has been in the news lately for a succession of damaging hurricanes. Yesterday’s German elections seem almost certain to lead to a so-called Jamaica coalition between Mrs. Merkel’s conservatives (CDU/CSU), the liberal FDP and the Greens. (The party colours, black, yellow, green, are those of the island’s national flag). Is Europe in for stormy times? It certainly looks like it.

The debate on reforming the EU and especially the Euro Area is at a critical phase. There has been a flurry of proposals and reflection papers from the EU Commission and think-tanks. Jean-Claude Juncker’s recent State of the EU speech held out the prospect of a push towards deepening EMU. The new French President, Emmanuel Macron, has embarked on domestic reforms, part of the rationale of which is to open up space for Euro Area governance reforms. A speech on this issue is scheduled for this week. Everyone has been waiting for the German elections.

On Sunday Emmanuel Macron embarks on a five-year term as President of the second largest EU country. An overwhelming two-thirds of those casting a valid ballot – and a sizeable 42% of all eligible voters – backed him. French people are weary of the political system, as manifested by the demise of the traditional centre-right and centre-left parties. While France faces several problems, its economic and social model is far from the basket case that it is often made out to be by those antithetic to a large public sector and who want more liberté and less égalité et fraternité.

Nonetheless, the fact is that without external support Macron and his La République en marche! Movement/party will fail. The reasons for this are not the superficial ones linked to the candidate himself. His youth and inexperience are not the issue. He may lack a party machine but he does not need a parliamentary majority for the party emerging from his movement. I would be surprised if he fails to put together a working-majority coalition between centrists and the right wing of the social democrats (PS) and the left wing of the conservatives. With the PS pulverised and the Republicans demoralised, I don’t anticipate any shortage of takers.

His problem – and it is very much Europe’s problem – is rather that his programme is very unlikely to work electorally under prevailing circumstances. Essentially, ‘Macronism’ consists of a two-handed, and supposedly joined-up, strategy. At home, ‘structural’ reforms to increase competitiveness and stimulate growth, along with moderate fiscal consolidation to reduce government debt levels. In Europe, far-reaching changes to economic governance in the direction of a step-change in political integration, driven by a new and equal partnership between that old two-cylinder motor: Germany and France. The alleged link is that the efforts to strengthen France domestically will force Germany to recognize it as an equal partner, while falling debt levels reduce the perceived risk to German policymakers of pooling sovereignty.

There are many reasons why this sensible-sounding approach is highly unlikely to work, unless external conditions change for the better. [Read more…]

The “E” in ECB stands, lest it be forgotten, for “European”. It is the central bank of all the countries belonging to the Euro Area. It is also thanks to the Treaty and its own statutes independent of instruction from European and national public bodies. This does not prevent national lobbyists, commentators and politicians from giving it unsolicited advice, however, particularly when ECB policies are perceived to be out of line with the real or supposed “national interest”, or that of the social group in question.

Germany is something of a special case in this regard, for a number of reasons. It is the EU country most clearly associated with inflation-hawkism and, related to that, upholding the idea of central bank independence. It is the largest Euro Area economy. In theory this makes it less likely that its economic needs will differ widely from those of the currency area as a whole, creating pressure to seek changes in the monetary policy stance. Yet, in practice Germany has been something of a Euro Area outlier. It would have needed lower interest rates for much of the pre-crisis EMU period and would not, by itself, require the extraordinary expansionary measures pursued recently by the ECB. Lastly, its size, economic performance and the nature of the euro crisis mean that Berlin very much calls the policymaking shots in the EU as a whole.

It is against this background that we should reflect on reports that Chancellor Merkel is today meeting Mario Draghi and has been urged by party officials, Bundesbank president Weidmann and lobbyists from the German financial sector to – how to put this delicately? – persuade the ECB president to bring low interest rates and quantitative easing to an end sooner rather than later. [Read more…]